oversight

Community Development Financial Institutions and New Markets Tax Credit Programs in Metropolitan and Nonmetropolitan Areas

Published by the Government Accountability Office on 2012-04-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States Government Accountability Office
Washington, DC 20548




              April 26, 2012

              The Honorable Richard Durbin
              Chairman
              The Honorable Jerry Moran
              Ranking Member
              Subcommittee on Financial Services
                and General Government
              Committee on Appropriations
              United States Senate

              The Honorable Jo Ann Emerson
              Chairman
              The Honorable Jose E. Serrano
              Ranking Member
              Subcommittee on Financial Services
                and General Government
              Committee on Appropriations
              House of Representatives

              Subject: Community Development Financial Institutions and New Markets Tax Credit Programs
              in Metropolitan and Nonmetropolitan Areas

              The Riegle Community Development and Regulatory Improvement Act of 1994 created the
              Community Development Financial Institutions (CDFI) Fund under the Department of the
              Treasury to help promote access to capital and credit in underserved urban and rural
              communities across the country. 1 The CDFI Fund carries out this mission through two primary
              programs: the CDFI Program and the New Markets Tax Credit (NMTC) Program. The CDFI
              Program awards financial and technical assistance to CDFIs for financial and development
              services, cash or capital reserves, operating expenses, and capacity building. CDFIs are
              specialized financial institutions—including community development banks and credit unions
              and nonregulated institutions such as loan and venture capital funds—that operate in markets
              underserved by traditional financial institutions. The NMTC Program, created by the Community
              Renewal Tax Relief Act of 2000, allocates tax credit authority (in this report, tax credits) to
              community development entities (CDE), which are domestic corporations or partnerships with a
              primary mission of serving low-income communities or low-income persons that act as



              1
               The Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. No. 103-325, 108 Stat. 2160
              (1994).




                                                                                       GAO-12-547R Community Development
intermediaries in providing loans, investments, or financial counseling in low-income
communities. 2 CDEs can use the tax credits to attract equity investments from investors who
can, in turn, claim a tax credit over 7 years totaling 39 percent of their qualifying equity
investment. 3 The CDFI Program awarded a total of $443 million to CDFIs from fiscal years 2004
through 2010, while the NMTC Program allocated tax credits worth $27 billion to CDEs from
fiscal years 2003 through 2010. 4 Both programs’ statutes include provisions requiring them to
ensure at least a minimum level of assistance to nonmetropolitan areas.

House Report 112-136, referenced by the Consolidated Appropriations Act of 2012, requires
that we conduct a study on the concentration of CDFIs and NMTCs in urban areas and
comment on the extent that program design, administration, or history contributed to the early
establishment of CDFIs in urban areas. 5 In this report, we examine (1) how the CDFI Fund
awards funds and allocates tax credits to recipients and how program policies affect the amount
of funding and tax credits to metropolitan and nonmetropolitan areas, and (2) the extent to
which the amounts of program awards and allocations that recipients receive differ in
metropolitan and nonmetropolitan areas. We used the terms “metropolitan” and
“nonmetropolitan” to make geographic distinctions between areas that have urban and rural
characteristics for consistency in presentation and because some of the data available in
program reports use these designations.

To address the first objective, we reviewed documentation related to the CDFI Fund’s policies
and procedures for distributing financial and technical assistance awards and tax credits to
certified CDFIs and CDEs, respectively. We also reviewed CDFI Fund documents, laws, and
regulations, prior GAO reports, and other applicable documentation to determine how CDFI and
NMTC program policies and other factors have affected the amount of funding and tax credits
directed to CDFIs and CDEs in metropolitan and nonmetropolitan areas. To address the second
objective, we analyzed CDFI Fund data on primary geographic areas (metropolitan or
nonmetropolitan) served by CDFIs that received awards or allocations, the total amounts of
awards and allocations CDFIs and CDEs received, and amounts of funding and investments
they deployed to metropolitan and nonmetropolitan areas. Our review focused on the period for
which complete transaction-level data were available for individual transactions from the CDFI
Fund’s Community Investment Impact System database. Specifically, we examined data from
fiscal years 2004 through 2010 for the CDFI Program and fiscal years 2003 through 2010 for the
NMTC Program. 6 The transaction-level data for the CDFI Program represent CDFIs’ loans and


2
 The Community Renewal Tax Relief Act of 2000, Pub. L. No. 106-554, § 121, 114 Stat. 2763 (2000). The Act
generally defines low-income communities as census tracts with poverty rates of at least 20 percent or median family
incomes of no more than 80 percent of statewide median family income. The NMTC Program generally defines low-
income persons as individuals with income of not more than 80 percent of the area median family income.
3
 A qualified equity investment is any equity investment in a CDE that an investor acquires at its original issue solely in
exchange for cash. The CDE must use at least 85 percent of the cash to make investments in NMTC-eligible low-
income communities.
4
 The time periods for these data reflect the periods for which public release data were available from the CDFI Fund’s
Community Investment Impact System. The CDFI and NMTC Programs began making awards in 1994 and 2002,
respectively.
5
 Consolidated Appropriations Act of 2012, Pub. L. No. 112-74, 125 Stat. 786 (2012); H.R. Rep. No. 112-136, at 14
(2012).
6
 Although we present CDE transaction-level data on a fiscal year basis, the NMTC Program conducts its allocation
rounds on a calendar year basis. Therefore, this report presents NMTC Program allocation data (in other words,
information on tax credit allocations the NMTC Program made to CDEs) in terms of calendar years.




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investments outstanding (which we refer to as total portfolio outstanding) at the end of each
reporting year and reflect CDFI Program awards combined with all of the CDFIs’ other funding
sources. In other words, the data do not allow us to identify which loans and investments
outstanding, or how much of the dollar amount of CDFIs’ total portfolios outstanding, resulted
directly from CDFI Program awards. In addition, because not all CDFI awardees must report
transaction-level data, we cannot generalize the findings to the entire CDFI awardee (recipient)
population. We examined trends in the amount and number of CDFI- and CDE-financed
projects in metropolitan and nonmetropolitan areas. We interviewed CDFI Fund officials and
reviewed information from the CDFI Fund and its data contractors on the steps taken to ensure
the reliability of their data. For example, we reviewed their processes for ensuring consistent
data entry and for addressing potentially inaccurate data. We also checked the data for extreme
values and missing data points. We determined that the data were reliable for our purposes.

We conducted this performance audit from January to April 2012 in accordance with generally
accepted government auditing standards. Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We believe that the evidence obtained provides
a reasonable basis for our findings and conclusions based on our audit objectives. Enclosure I
provides a more-detailed description of our scope and methodology.

Results in Brief
The policies and procedures of the CDFI and NMTC Programs help ensure that awards and
allocations generally are proportionate to the numbers of qualified applicants that serve
metropolitan and nonmetropolitan areas. The CDFI Program’s authorizing legislation and
regulations require that award recipients constitute a geographically diverse group, serving
metropolitan and nonmetropolitan areas and Native communities from different U.S. regions. To
meet this requirement, CDFI Program officials have used the application review process and
established a goal of matching the proportion of awards to the proportion of qualified applicants
that primarily serve nonmetropolitan areas. This proportion changed from year to year
depending on the number of qualified applicants that served nonmetropolitan areas. According
to officials, revisions to the award procedures in the fiscal year 2012 funding round will enhance
the CDFI Program’s ability to achieve proportionality. In 2006, Congress, in the Tax Relief and
Health Care Act of 2006, added a requirement for the NMTC Program that nonmetropolitan
counties receive a proportional allocation of qualified equity investments. 7 To meet this
requirement, in 2008, the NMTC Program implemented two goals in its application review
process. The first goal requires that a proportionate number of tax credits are allocated to
recipients that principally serve nonmetropolitan counties. 8 The second goal requires that at
least 20 percent of all community investments resulting from the annual NMTC allocations are
made in eligible nonmetropolitan counties.

The programs awarded the majority of funds and tax credits to recipients that served metropolitan
areas, but both generally met their proportionality goals with regard to ensuring assistance to



7
    Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, Div. A, Tit. I, § 102(b), 120 Stat. 2922 (2006).
8
 Specifically, such a recipient is one that, over the past 5 years, has dedicated at least 50 percent of its direct
financing dollars to nonmetropolitan counties and has committed in its application to dedicate at least 50 percent of its
future NMTC direct financing dollars to such areas. The recipient is not required to be physically located in a
nonmetropolitan area to be designated as such.




Page 3                                                                             GAO-12-547R Community Development
nonmetropolitan areas. From fiscal years 2004 through 2010, CDFI Program financial assistance
awards to recipients serving primarily nonmetropolitan areas were proportional to the number of
qualified applicants that served those areas in every year except 2008. For example, in 2010, 29
percent of award recipients primarily served nonmetropolitan areas, exceeding that year’s
proportionality goal of 27 percent. Based on recipients’ annual reporting for fiscal years 2004
through 2010, about 18 percent of recipients’ total annual loans and investments outstanding were
in nonmetropolitan areas. For the NMTC Program, since implementing the two proportionality
goals in the calendar year 2008 round, program officials stated that they have been successful in
helping ensure that a proportional number of tax credits went to recipients that serve
nonmetropolitan areas and that 20 percent of all NMTC investments were committed to
nonmetropolitan areas. From calendar years 2008 through 2011, recipients committed to deploy
more than $3 billion, or 20 percent of total investments, in nonmetropolitan areas. In 2010, the
proportion of the dollar amount of NMTC projects financed that went to nonmetropolitan areas
increased to 21 percent, which exceeded the program goal of 20 percent.

Background
In general, financial institutions must be certified as CDFIs or CDEs before they can receive
CDFI Program awards or NMTC allocations, respectively. Table 1 lists the criteria that entities
must meet to become certified. For example, CDFIs and CDEs generally must be legal entities
that provide the majority of their financial services to low-income persons or communities and
maintain accountability to those communities by having members that represent them on their
governing or advisory boards. The CDFI Fund follows detailed procedures to ensure that
certified entities meet the criteria.

Table 1: Eligibility Criteria for CDFI and CDE Certification

 CDFI                                                                 CDE
 • Be a legal entity                                                  • Be a legal entity and a domestic corporation or
 • Have a primary mission of promoting community                        partnership for federal tax purposes
   development                                                        • Have a primary mission of serving or providing
 • Primarily provide financial products, development                    investment capital to low-income communities or low-
   services, or other similar financing in arms-length                  income persons and target at least 60 percent of
   transactions                                                         activities to these groups
 • Primarily serve (direct at least 60 percent of                     • Maintain accountability to low-income communities
   financial product activities to) one or more                         through representation on governing or advisory
   geographic investment areas meeting certain                          board
   poverty or income standards; low-income targeted                   • Note: Certified CDFIs and Specialized Small
   populations; or other targeted populations that lack                 Business Investment Companies automatically
   adequate access to capital and historically have                     qualify as CDEs and only need to register as CDEs
   been denied credit                                                   rather than apply for certification.
 • Provide development services—such as credit or
   homebuyer counseling—in conjunction with
   financial products
 • Maintain accountability to defined target markets
   through representation on governing or advisory
   board or through outreach activities
 • Be a nongovernment entity and not be under
   control of any government entity (except tribal
   governments)
Sources: CDFI Fund; CDFI and NMTC Program statutes and regulations.




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As of February 29, 2012, there were a total of 977 certified CDFIs and 5,500 certified CDEs,
including subsidiary CDEs. 9 Enclosure II lists the numbers of certified CDFIs and CDEs by
state. The total number of certified CDFIs and CDEs is much higher than the number that
typically applies for and obtains program awards in any given year. In addition, not all financial
institutions that seek certification will obtain it. Certification rates for CDFIs averaged about 77
percent from fiscal years 2004 through 2010, while CDEs obtained certification about 91 percent
of the time from calendar years 2003 through 2010 (see table 2). Agency officials told us that,
based on their analysis of fiscal year 2011 certification data, the most common reasons for
denying CDFI certification applications were failure to meet the criteria for primary service to
eligible target markets and accountability to those markets. They stated that in prior years, these
were also two of the most common reasons for denials of certification applications. Failure to
meet the financing entity criteria was also historically a reason for denial. They attributed the
majority of CDE certification denials to failure to establish accountability to low-income
communities.

Table 2: Certification Rates for CDFIs (Fiscal Years 2004-2010) and CDEs (Calendar Years 2003-2010)

                                  2003    2004      2005        2006        2007        2008         2009    2010   Total
 CDFIs
 Certified                          N/A     34         72        144           32          32          71     162     547
 Declined                           N/A     50         15          11          12          15          32     30      165
 Certification rate                 N/A   40%       83%          93%         73%         68%         69%     84%     77%
 CDEs
 Certified                          211    153       155           33         121         100         104     134   1,011
 Declined                            18     14         12           3           9            9         16     21      102
 Certification rate                92%    92%       93%          92%         93%         92%         87%     86%     91%
Source: GAO analysis of CDFI Fund data.

Note: The CDE certification rates in this table include only “applicant CDEs” and exclude subsidiary CDEs.


The CDFI Program provides financial or technical assistance to CDFIs to enhance their ability to
make loans and investments and provide services for the benefit of designated investment
areas, targeted populations, or both. 10 CDFIs can apply for (1) financial assistance awards,
which can be used for financial products or services such as loans and checking and savings
accounts, development services such as financial or homeownership counseling, loan loss and
capital reserves, and operations; or (2) technical assistance awards, which can be used for
capacity-building purposes such as personnel salary, professional services, travel, training, and
equipment and supplies. As shown in table 3, financial assistance applicants may apply as
regular applicants or as Small and Emerging CDFI Assistance (SECA) applicants. SECA
applicants are CDFIs that have smaller assets or have been operating for fewer than 5 years.
However, regular applicants can apply for more financial assistance funding (for the fiscal year
2011 funding round, up to $2 million) than SECA applicants (which can apply for $600,000).
Technical assistance awards were capped in fiscal year 2011 at $100,000 per awardee. Since


9
 Subsidiary CDEs are legal entities that applicant CDEs own or directly control and to which CDEs can transfer all or
part of their allocation authority.
10
  Financial assistance can be in the form of grants, loans, credit union shares, equity investments, and deposits to
CDFIs. However, most financial assistance awards are in the form of grants. Investment areas and targeted
populations are defined in 12 C.F.R. § 1805.201(b)(3).




Page 5                                                                                   GAO-12-547R Community Development
1994, the CDFI Program has disbursed more than $1 billion in financial and technical
assistance awards.

Table 3: CDFI Financial and Technical Assistance Program Details

                                                                                                              Fiscal
                                                        Eligible uses for                                  year 2011   Matching fund
                                                                                                                                   a
    Funding and applicant type Applicant criteria       funds                                             award cap    requirement
    Financial    Regular       Certified or certifiable • Financial products                              $2,000,000   100% match
    Assistance                 CDFIb                    •   Financial services                                         from nonfederal
                                                                                                                       sources
                                                        •   Development
                 Small and     •  Certified or              services                                       $600,000    100% match
                 Emerging CDFI    certifiable CDFI                                                                     from nonfederal
                                                        •   Loan loss reserves
                 Assistance    •  Total assets of up • Capital reserves                                                sources
                 (SECA)           to $5 million (up to
                                  $250 million for      •   Operations
                                  community
                                  development
                                  banks and up to
                                  $10 million for
                                  insured credit
                                  unions and
                                  venture capital
                                  funds) or in
                                  operation for fewer
                                  than 5 years
    Technical                                  Certified, certifiable or      •   Personnel (salary        $100,000    None
                                                                 c
    assistance                                 emerging CDFI                      and fringe benefits)
                                                                              •   Professional
                                                                                  services
                                                                              •   Travel
                                                                              •   Training
                                                                              •   Equipment
                                                                              •   Materials/supplies
                                                                              •   Other
Source: CDFI Fund 2011 Notice of Funding Availability, 76 Fed. Reg. 68,831.

Notes:
a
 Matching funds must be comparable in form and value to the financial assistance award. Congress waived the matching funds
requirement in the fiscal year 2009, 2010, and 2011 federal budgets.
b
A certifiable CDFI has submitted an application to the CDFI Fund demonstrating that it meets the certification requirements, but the
CDFI Fund has not yet officially certified the entity.
c
 An emerging CDFI is an entity that demonstrates to the CDFI Fund that it has an acceptable plan to become a certified CDFI within
approximately 3 years.


Congress created the NMTC Program in 2000 under the CDFI Fund to encourage investors to
make investments in impoverished, low-income communities that traditionally lack access to
capital. CDEs may apply for and receive tax credits, at which point investors can make qualified
equity investments by acquiring stock or a capital interest in the CDEs in exchange for the ability
to claim the tax credits on a portion of their investment. The CDEs, in turn, must use at least 85
percent of the investment proceeds for community investments, which can be in qualified low-
income community businesses and used for residential, commercial, and industrial projects or




Page 6                                                                                               GAO-12-547R Community Development
can be used for other types of activities, such as purchasing loans from other CDEs. 11 Since its
inception, the NMTC Program has awarded $33 billion in tax credits to CDEs. The program
expired at the end of 2011, but legislation has been proposed to extend it and the administration
has asked for an extension in its 2013 budget proposal. 12

The CDFI and NMTC Programs use varying terminology to describe program activity
geographically, depending on the program stage. For example, in the application stage, both
programs ask applicants to indicate whether they primarily serve major urban, minor urban, or
rural (nonmetropolitan for the NMTC Program) areas. 13 The programs also require awardees
and allocatees to commit to the areas that they will serve with their awards and tax credits. At
this point, the terminologies diverge. While the CDFI Program continues to use the major and
minor urban and rural classifications, the NMTC Program uses the metropolitan and
nonmetropolitan classifications as defined by the 1999 Office of Management and Budget
bulletin, with the former term referring to a metropolitan statistical area with a core city or urban
center of population 50,000 or more and its surrounding communities and the latter term
referring to anything other than a metropolitan area. 14 Finally, when agency officials collect
annual data from awardees and allocatees on the use of their funds, both the CDFI Program
data and the NMTC Program data are classified using the 1999 Office of Management and
Budget bulletin (the “metropolitan” and “nonmetropolitan” system). To simplify the discussion,
this report generally uses metropolitan and nonmetropolitan for both programs, as defined by
the Office of Management and Budget. 15 As of 2011, approximately 16 percent of the U.S.
population resided in nonmetropolitan areas. 16

Program Policies and Procedures Aim to Make Awards and Allocations
Proportionate to Numbers of Applicants That Serve Nonmetropolitan Areas
CDFI Program
The CDFI Program’s policies and procedures for reviewing funding applications and making
financial and technical assistance awards are intended to encourage assistance to
nonmetropolitan areas. After CDFI Program staff checks all applications for completeness and
applicant eligibility, reviewers from outside of the CDFI Fund (three reviewers per financial


11
  CDEs make community investments with the proceeds of qualified equity investments from outside investors. The
community investments can include any capital or equity investments in, or loans to, qualified active low-income
community businesses; loans purchased from other CDEs; financial counseling and other services to qualified active
low-income community businesses, or to residents of a low-income community; or equity investments in, or loans to,
other CDEs. For more information about the NMTC investment process, see GAO, New Markets Tax Credit: The
Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified, GAO-10-334
(Washington, D.C.: Jan. 29, 2010).
12
 See S. 996, 112th Cong. (2011); H.R. 2655, 112th Cong. (2011); Office of Management and Budget, Executive
Office of the President, Fiscal Year 2013 Budget of the U.S. Government (2012).
13
  According to the CDFI Fund, a major urban area is a metropolitan statistical area with a population equal to or
greater than 1 million, including both central city and surrounding suburbs. A minor urban area is a metropolitan
statistical area with a population of more than 50,000 and less than 1 million, including both central city and
surrounding suburbs. A rural area is any area not contained in a major or minor urban area.
14
 See OMB Bulletin No. 99-04.
15
 See enclosure I for more detail on how we classified geographic areas in this report.
16
  U.S. Census Bureau, Core Based Statistical Area (CBSA) Status for the United States, Regions, and Divisions,
and for Puerto Rico: 2010 and 2011, CBSA-EST2011-12 (Washington, D.C.: April 2012).




Page 7                                                                          GAO-12-547R Community Development
assistance application and one reviewer per technical assistance application) evaluate the
applications. Specifically, financial and technical assistance applicants are scored on and can
receive up to 100 points from each reviewer for criteria such as how they meet the needs of
their target market and their delivery capacity. As shown in figure 1, applicants that meet or
exceed an overall scoring threshold and a threshold in each of the application sections advance
to the second phase of the application review process in which CDFI Program officials
determine—based on a final ranking score—which applicants will receive awards and how
much they will receive.

Figure 1: CDFI Program Financial and Technical Assistance Award Process




a
CDFI Program officials also check for diversity with regard to geographic region and institution type.
b
 Until the fiscal year 2012 funding round, this process might not have resulted in full proportionality with regard to nonmetropolitan
areas. Because reducing award amounts to allow for additional awards could decrease the awards’ significance to CDFIs, CDFI
Program officials must consider whether award reductions to achieve proportionality are in the best interest of the overall
awardee pool.


The CDFI Program’s authorizing legislation and regulations require that awardees represent a
geographically diverse group, serving metropolitan and nonmetropolitan areas and Native
communities. 17 According to CDFI Program officials, to meet this requirement, they have tried to
match the proportion of awards to the proportion of the qualified applicant pool with
nonmetropolitan service areas during the application review process. For example, if 25 percent
of qualified applicants in a given funding round indicated a nonmetropolitan service area, the
CDFI Program would strive to make 25 percent of the total aggregate number of financial and
technical assistance awards to CDFIs with nonmetropolitan service areas. This proportion can
change from year to year depending on the number of applicants that serve nonmetropolitan
areas and meet the minimum scoring threshold. Until recently, the CDFI Program’s procedures
did not allow officials to bypass other qualified applicants to select those with nonmetropolitan
service areas, which impeded the program’s ability to meet desired proportionality goals in
certain years. However, for the fiscal year 2012 funding round, the CDFI Program’s procedures



17
    12 CFR §1805.700(d).




Page 8                                                                                      GAO-12-547R Community Development
have been revised to better support goal achievement. That is, CDFI Program officials can now
bypass certain applicants on the ordered ranking list to select qualified but lower-ranked
applicants to achieve geographic and institutional diversity.

In addition, according to CDFI Program officials, the SECA category for financial assistance
awards, as well as the technical assistance awards, is helpful to CDFIs located in or serving
nonmetropolitan areas. Officials stated that CDFIs in nonmetropolitan communities are often
smaller in asset size and typically have fewer employees than their counterparts in metropolitan
communities. The SECA category for financial assistance funding allows CDFIs with assets of
less than a certain amount or in operation for fewer than 5 years to apply and compete
separately from larger and more established CDFIs. In addition, program officials noted that
technical assistance funding is useful to smaller and less established organizations because it
can help them build capacity. Technical assistance awards can be used for such items as staff
salaries and benefits, consultants, professional services, and computer equipment. 18

NMTC Program
The NMTC Program’s process for making NMTC awards reflects a recent policy change that
ensures investment commitments in nonmetropolitan areas. In 2006, Congress required the
NMTC Program to ensure that nonmetropolitan counties receive a proportional allocation of
qualified equity investments. 19 To guide its implementation of the requirement, in 2007, the
CDFI Fund published a Request for Public Comments to obtain feedback on how to define,
measure, and ensure “proportionality.” Based on the public comments received, NMTC Program
officials developed two goals, which they implemented in the calendar year 2008 funding round,
to ensure compliance with the new requirement. First, program officials must review the annual
allocation decisions and add additional allocatees if necessary to ensure that a proportionate
number of applicants that are “rural CDEs”—CDEs that principally serve nonmetropolitan
counties—receive tax credits. Second, program officials attempt to ensure through
consideration of applicants’ commitments to invest in nonmetropolitan areas that at least 20
percent of the aggregate investments made with each round of NMTC allocations are made in
eligible nonmetropolitan counties. With regard to the second goal, although public
commentators suggested a variety of benchmarks for the minimum proportion to be committed
to nonmetropolitan areas, program officials chose 20 percent because it approximated the
percentage of the U.S. population that—according to the CDFI Fund’s analysis—resided in
nonmetropolitan counties. 20 Thus, in recent years, NMTC Program officials have used the
review process to ensure proportionate selection on two levels—in terms of areas served and
amount of investment committed in those areas.

For the current review process, the NMTC Program first selects a group of three external
reviewers with demonstrated experience in business, real estate, or community development


18
  While not within the scope of this report, the CDFI Fund’s Native American CDFI Assistance Program provides
similar awards to CDFIs and organizations that serve economically distressed Native communities. According to the
CDFI Fund, these organizations serve mostly rural communities. In 2009, the CDFI Fund also implemented a
Capacity Building Initiative to provide technical assistance and training opportunities for CDFIs. The initiative also
focuses on extending CDFI coverage to underserved communities, including a specialized focus in rural areas.
19
  Pub. L. No. 109-432, Div. A, Tit. I, § 102(b).
20
   The NMTC Program applies the 1999 Office of Management and Budget bulletin definition of nonmetropolitan
areas to 2000 data to determine eligibility. According to this classification system, 19.6 percent of the U.S. population
lived in nonmetropolitan counties in 2000.




Page 9                                                                            GAO-12-547R Community Development
finance. Applications are scored on a scale of 100 points for sections on business strategy,
community impact, management capacity, and capitalization strategy. Applicants also can
receive up to 10 “priority” points by demonstrating a record of successful investment in
disadvantaged communities or businesses and by investing in businesses unrelated to the
applicant. 21

CDEs that meet or exceed an overall scoring threshold and a threshold in each of the four
application sections listed previously advance to the second phase of the review, in which a
panel of up to three NMTC Program officials determine—based on a final ranking score—which
CDEs will receive allocations and how much they will receive. NMTC Program staff review the
amount of tax credits that the CDEs requested and, based on the information in the application
materials, award preliminary allocation amounts in the order of CDEs’ final ranking scores until
the allocations are exhausted. Not all of the CDEs that satisfy the minimum application score
thresholds receive allocations. 22

After making award decisions, the NMTC Program analyzes the allocatee pool to determine
whether it has met the two proportionality goals. If the percentage of allocatees that are rural
CDEs is not at least equal to the percentage of qualified applicants that are rural CDEs, the fund
provides allocations to additional qualified rural CDEs from that pool in descending order of their
final ranking score until it achieves the appropriate percentage balance. If necessary to
accommodate the additional allocatees without exceeding the available tax credits, NMTC
Program officials apply a reduction to all allocations to CDEs that have not committed to make
at least 20 percent of their community investments in nonmetropolitan areas. For the second
proportionality goal, all applicants must specify a minimum and maximum percentage of their
community investments that they are willing to commit to nonmetropolitan areas. For example,
an applicant might indicate that it will commit to making at least 15 percent but no more than 30
percent of its community investments in nonmetropolitan areas, while another applicant might
indicate that it will make all of its community investments in metropolitan areas. NMTC Program
officials calculate the minimum amount of community investments that all allocatees have
committed to nonmetropolitan areas. If allocatees have not committed to making at least 20
percent of their aggregate community investments in nonmetropolitan areas, the NMTC
Program can require allocatees to direct more investments—up to the maximum percentages
they indicated in their applications—to nonmetropolitan areas. If, after applying the maximum
percentages, the aggregate commitment to nonmetropolitan areas still does not equal at least
20 percent, the NMTC Program can award additional allocations to rural CDEs in descending
order of their final ranking score, applying a formula reduction to all allocations for which
allocatees have not committed at least 20 percent of investments to nonmetropolitan areas.
Figure 2 illustrates the NMTC allocation process with a hypothetical example.




21
 The NMTC Program’s review process is similar to the CDFI program’s review process; see figure 1.
22
  For a more-detailed description of the criteria used to evaluate NMTC Program applications, see GAO, New
Markets Tax Credit: Minority Entities Are Less Successful in Obtaining Awards Than Non-Minority Entities,
GAO-09-536 (Washington, D.C., Apr. 30, 2009).




Page 10                                                                     GAO-12-547R Community Development
Figure 2: Illustration of the NMTC Program Allocation Process




Notes: This figure is an example of applying NMTC Program proportionality goals to hypothetical application information.
a
 Require any or all allocatees to direct additional community investments to nonmetropolitan areas (up to the maximum percentage
they committed to in their applications). Based on track records and ability to deploy investments in nonmetropolitan areas, require
eight allocatees to direct an additional $62 million in community investments to nonmetropolitan areas.


To address potential challenges in implementing NMTC projects in nonmetropolitan
communities, the NMTC Program gives rural CDEs an extra year to raise qualified equity
investments and deploy the proceeds for community investments. Specifically, most CDEs must
raise at least 20 percent of their qualified equity investments (in exchange for the tax credits that
they can provide to investors) within 1 year after they receive their allocations, and they must
deploy the proceeds of those qualified equity investments to qualified businesses within 1 year
after raising the investments. However, rural CDEs receive an extra year to meet these
requirements because of the potential difficulties in carrying out NMTC projects in
nonmetropolitan areas. In particular, we have previously reported that CDEs can face
challenges in using NMTCs to invest in smaller projects because transaction costs, such as
legal fees or compliance monitoring costs, tend to be fixed (thus, smaller transactions would not
incur lower transaction costs relative to the size of the project). 23 Because of high transaction
costs, NMTC Program officials said that the minimum investment size of an NMTC transaction
is commonly $5 million to $6 million. They explained that the federal tax structure related to the
NMTC Program tends to benefit larger-size projects or deals. This structure may put CDEs that



23
    GAO-10-334.




Page 11                                                                                   GAO-12-547R Community Development
wish to invest in nonmetropolitan areas—where projects can be smaller than in metropolitan
areas—at a disadvantage. 24

Both Programs Directed Most Awards and Tax Credits to Metropolitan Areas, but
Generally Met Proportionality Goals for Nonmetropolitan Areas
The CDFI and NMTC Programs awarded the majority of funds and tax credits to recipients that
served metropolitan areas, but both generally met their goals with regard to proportionality in
nonmetropolitan areas. For both programs, we looked at the differences in the level of assistance
provided to metropolitan and nonmetropolitan areas. Specifically, for each of the programs, we
looked at the metropolitan and nonmetropolitan distributions of (1) awards and commitments, and
(2) total portfolio outstanding (CDFI Program) and projects financed (NMTC Program).

CDFI Program
CDFI Program officials stated that they typically had been able to meet their goal of making
awards proportionate to the number of qualified applicants that primarily serve nonmetropolitan
areas. We analyzed the financial assistance award data for fiscal years 2004 through 2010 to
determine the extent to which the CDFI Program met the geographic diversity goal. During this
period, the proportion of awardees that primarily served nonmetropolitan areas equaled or
exceeded the proportion of qualified applicants that served these areas every year except in
2008, when awardees serving nonmetropolitan areas represented 26 percent of all awardees
compared with 35 percent of all qualified applicants (see table 4).

Table 4: Proportion of Qualified Applicants and Awardees Serving Nonmetropolitan Areas for CDFI Program,
Fiscal Years 2004-2010

                                          Qualified applicants                              Awardees
                   Number serving                      Percentage serving           Number serving Percentage serving
                   nonmetropolitan                       nonmetropolitan            nonmetropolitan  nonmetropolitan
 Fiscal year Total          areas                                   areas   Total            areas              areas
        a
 2004                   78                        21                 27%      67                19                28%
 2005                 124                         37                 30%      48                17                35%
 2006                 121                         28                 23%      52                15                29%
 2007                 119                         26                 22%      49                11                22%
 2008                 158                         56                 35%      66                17                26%
 2009                 337                         89                 26%     121                33                27%
 2010                 292                         79                 27%     147                42                29%
Source: GAO analysis of CDFI Fund data.




24
  Under IRC §45D(g)(3), there is a recapture provision by which an investor can lose the right to claim the NMTC if
certain conditions are not met throughout the seven-year period after the qualified equity investment is made. In its
February 6, 2012 response to the CDFI Fund’s Request for Public Comments on the NMTC Program, Novogradac
and Company stated on behalf of the NMTC Working Group that the recapture provision increases transaction costs
and discourages investments in specific types of businesses, including non-real estate businesses. The Internal
Revenue Service recently indicated that non-real estate investments may be smaller than real estate investments,
and it has proposed regulations that would modify the NMTC Program to facilitate and encourage investments in non-
real-estate businesses in low-income communities. In addition, it requested comments on potential regulatory
changes that would simplify the substantiation requirements in cases where CDEs invest qualified equity investment
proceeds in other CDEs that then make smaller (i.e., less than $250,000) loans to non-real-estate businesses in low-
income communities.




Page 12                                                                               GAO-12-547R Community Development
Notes: The data in the table reflect the CDFI Program’s financial assistance awards only. Data on technical assistance awards were not
readily available within the time frames of this review. According to an official, recipients of technical assistance awards are more likely
to serve nonmetropolitan areas. As a result, the percentages in the table are likely understated, but the extent of this difference is limited
since the CDFI Program makes considerably fewer technical assistance awards compared with financial assistance awards.
a
 The CDFI Program utilized a different scoring method for regular and Small and Emerging CDFI Assistance (SECA) applicants and
a different applicant grouping process to categorize the two applicant types in fiscal year 2004. However, because applicants in
2004 still had to meet a minimum scoring threshold to be considered qualified, we believe that this does not significantly impact our
analysis.


The total financial and technical assistance award amounts varied for CDFIs primarily serving
nonmetropolitan areas. 25 From fiscal years 2004 through 2010, awards to CDFIs that indicated
they primarily served nonmetropolitan areas totaled about $126 million, or about 29 percent of
the $436 million in all awards for that period, compared with about $311 million (71 percent) that
went to CDFIs serving primarily metropolitan areas. 26 As shown in figure 3, the proportion of
awards to these CDFIs varied considerably over the review period. However, it averaged just
under 30 percent across that time period.




25
  From fiscal years 2004 through 2010, the CDFI program awarded a total of $436 million, of which approximately
$414 million (95 percent) was in financial assistance awards and $23 million (5 percent) was in technical assistance
awards. Dollar amounts have been rounded.
26
  Amounts do not sum to $436 million because of rounding. As part of the CDFI application for combined financial
and technical awards, applicants select the primary geographic market they serve, although they may also serve a
combination of metropolitan and nonmetropolitan markets.




Page 13                                                                                        GAO-12-547R Community Development
Figure 3: Total Financial and Technical Assistance Award Amounts by CDFIs’ Primary Service Area, Fiscal
Years 2004-2010




Note: The increase in funding amount in the last 2 years of the period is a result of additional funding from the American Recovery
and Reinvestment Act in 2009 and a higher appropriation in 2010 than in previous years.


For fiscal years 2004 through 2010, CDFIs’ total loans and investments outstanding in
nonmetropolitan areas annually averaged about 18 percent of their total portfolios outstanding,
reflecting an increase to nonmetropolitan areas in recent years (see fig. 4). As stated earlier,
CDFIs must report all of their loans and investments outstanding, which includes program
awards combined with all of their other sources of funding. 27 From a low of about $55 million in
2004, the dollar amount of CDFIs’ total loans and investments outstanding in nonmetropolitan
areas grew fivefold in 2005 and then increased steadily until 2009 and marginally decreased in
2010. From 2008 through 2010, CDFIs’ total loans and investments outstanding in
nonmetropolitan areas exceeded $1 billion annually. As a percentage of CDFIs’ total portfolios,
the dollar amounts to nonmetropolitan areas remained fairly stable throughout this period. A
similar trend occurred in metropolitan areas for the same period, as the total loans and
investments outstanding increased fivefold from 2004 to 2005, steadily increased for 3 years,


27
  According to CDFI Fund officials, the Fund does not require certain types of financial institutions (for example,
regulated depository institutions such as banks, bank holding companies, and credit unions) to report loan and
investment data because call reports capture this information. In addition, technical assistance awardees are not
required to submit detailed data because these awards are to be used for internal capacity-building activities rather
than for financial and developmental services to the community. However, some of these awardees voluntarily submit
the data to the CDFI Fund. For example, CDFI Fund officials stated that in fiscal year 2011, 21 of 37 regulated
depository institutions, or about 57 percent, voluntarily submitted these data reports. They also stated that, in general,
70 percent of all financial and technical assistance awardees submit these reports, as do approximately 85 percent of
all financial assistance awardees.




Page 14                                                                                   GAO-12-547R Community Development
and plateaued at approximately $4.3 billion annually from 2008 through 2010. CDFI Fund
officials stated that the growth in both metropolitan and nonmetropolitan total loans and
investments outstanding was a result of two factors. First, the overall level of CDFI Program
awards increased substantially over the time period. In 2004, total financial and technical
assistance awards were about $46 million, and in 2010 the combined awards totaled almost
$105 million. Second, partly because of the increase in total awards, the size of the individual
CDFIs’ assets increased, as reflected by the number and amount of loans and investments
made by reporting CDFIs. For example, the total portfolio outstanding for both metropolitan and
nonmetropolitan CDFIs in 2004 was $330 million, and the total portfolio outstanding in 2010 was
over $5 billion. See enclosure III for more details on CDFIs’ loans and investments outstanding
in nonmetropolitan areas, by state.

Figure 4: Total Dollar Amount and Number of CDFI Loans and Investments Outstanding in Metropolitan and
Nonmetropolitan Areas, Fiscal Years 2004-2010




Figure 4 also shows the number of loans and investments that CDFIs made in metropolitan and
nonmetropolitan areas from fiscal years 2004 through 2010. CDFIs made more than 290,000
loans and investments in metropolitan areas (73 percent) and more than 109,000 loans and
investments in nonmetropolitan areas (27 percent) over the entire period. In addition, the
proportion of loans and investments (27 percent) was greater than the proportion dollar amounts
(18 percent) of those loans and investments in nonmetropolitan areas for the same period. The
percentage of loans and investments in nonmetropolitan areas steadily decreased from its peak
at 34 percent in 2006 to 23 percent in 2009.

NMTC Program
Policy changes to the NMTC Program have helped to ensure that about 20 percent of CDEs’
community investments were committed to nonmetropolitan areas in recent years. Since the two
goals related to the proportionality requirement were implemented in the 2008 funding round,



Page 15                                                               GAO-12-547R Community Development
the NMTC Program has met the proportionality requirement. For the first proportionality goal,
NMTC Program officials stated that they have been able to ensure that a proportional number of
rural CDEs received tax credits and, for the second proportionality goal, that 20 percent of all
NMTC community investments were committed to nonmetropolitan counties. From calendar
years 2008 through 2011, rural CDEs received tax credits totaling almost $2 billion. On the
basis of their designation as rural CDEs, they were obligated to deploy at least 50 percent of
this amount in nonmetropolitan areas. During the same time period, CDEs (including both rural
and nonrural CDEs) committed to deploy more than $3 billion, or 20 percent of total
investments, in nonmetropolitan areas (see table 5). Data on investment commitments by areas
served are not available prior to 2008 because the NMTC Program did not track this
information.

Table 5: Total CDE Community Investment Commitments to Nonmetropolitan Counties, Calendar Years
2008-2011

Dollars in millions
                                                                                                         Percentage of total
                             Total Number of CDEs making                 Total investments           investments committed
    Calendar           community         nonmetropolitan                      committed to               to nonmetropolitan
    year              investments           commitmentsa           nonmetropolitan counties                        counties
    2008b                      $4,895                        60                             $989                            20%
    2009                       $4,880                        49                             $971                            20%
    2010                       $3,409                        46                             $682                            20%
    2011c                      $3,526                        34                             $708                            20%
    Totals                   $16,710                        189                           $3,350                            20%
Source: GAO analysis of CDFI Fund data.
a
 The numbers in this column reflect only CDEs that committed to make a minimal percentage of their investments in
nonmetropolitan counties, including rural CDEs. CDEs do not have to commit to investments in nonmetropolitan counties. However,
if CDEs do so, they must uphold the commitments.
b
 There were two NMTC allocation rounds for applicants that applied in 2008: the regular NMTC annual allocation round and an
additional allocation round authorized by the American Recovery and Reinvestment Act. Data in the 2008 row reflect both allocation
rounds.
c
 The NMTC Program announced the results of the calendar year 2011 allocation round in February 2012 and provided publicly
available data on tax credits to rural CDEs and overall investment commitments to nonmetropolitan counties.


Based on our review of annual data reported by CDEs through the fiscal year 2010 reporting
period, the proportion of NMTC projects financed in nonmetropolitan areas varied from 2003
through 2010 but increased appreciably in 2010 following the 2008 policy change requiring
proportional investments in these areas (see fig. 5). 28 From 2003 to 2005, the dollar amount of
projects financed in nonmetropolitan areas increased from about $9 million to $239 million (or
from 11 percent of total projects financed to 16 percent of total projects financed). During 2006
to 2009, the dollar amount of projects financed in nonmetropolitan areas fluctuated between a
low of $108 million to a high of $401 million. In the last year of the review period, the dollar
amount of projects financed in nonmetropolitan areas increased to over $1 billion (or 21 percent
of the total amount of projects financed). The dollar amount of projects financed in metropolitan
areas also varied throughout the review period but totaled over $4 billion in both fiscal years




28
  The number of projects that CDEs financed in nonmetropolitan areas from fiscal years 2003 through 2010
remained relatively steady as a percentage of all projects financed (approximately 17 percent).




Page 16                                                                                 GAO-12-547R Community Development
2009 and 2010. See enclosure IV for more details on CDEs’ projects financed in
nonmetropolitan areas, by state.

Figure 5: Dollar Amount and Number of CDE Projects Financed in Metropolitan and Nonmetropolitan Areas,
Fiscal Years 2003-2010




According to an NMTC Program official, for several reasons, NMTC Program data do not
immediately reflect the increased investments in nonmetropolitan areas that would be expected
to follow from the proportionality goals instituted in 2008. First, some of the 2008 awards were
not closed until 2009 under the American Recovery and Reinvestment Act of 2009. Second,
rural CDEs have an additional year to raise qualified equity investments and deploy the
proceeds as community investments. Lastly, CDEs have up to 180 days after the end of their
fiscal year to report to the CDFI Fund on projects financed. Consequently, in 2010, the data for
projects financed in nonmetropolitan areas reflect a substantial increase following from the 2008
policy change.




Page 17                                                              GAO-12-547R Community Development
Agency Comments and Our Evaluation
We provided a draft of this report to the Secretary of the Treasury for review and comment. In its
written comments, reproduced in enclosure V, Treasury concurred with the report’s
observations regarding the process and distribution of assistance to metropolitan and
nonmetropolitan areas for both programs. Treasury also provided technical comments that we
incorporated into the report, as appropriate.


We are sending copies of this report to the appropriate congressional committees and the
Secretary of the Treasury. In addition, the report is available at no charge on the GAO website
at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-8678 or
garciadiazd@gao.gov. Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff who made key contributions to
this report are listed in enclosure VI.




Daniel Garcia-Diaz
Acting Director, Financial Markets
  and Community Investment

Enclosures




Page 18                                                           GAO-12-547R Community Development
Enclosure I: Objectives, Scope, and Methodology
The objectives of this report were to assess (1) how the Community Development Financial
Institutions (CDFI) Fund awards funds and allocates tax credits to recipients and how program
policies affect the amount of funding and tax credits to metropolitan and nonmetropolitan areas,
and (2) the extent to which the amounts of program awards and allocations that recipients
receive differ in metropolitan and nonmetropolitan areas.

To address the first objective, we reviewed the CDFI and New Markets Tax Credit (NMTC)
Programs’ policies and procedures for distributing financial and technical assistance awards and
tax credits to certified CDFIs and community development entities (CDE), respectively. We
reviewed how the programs’ policies and procedures considered and weighed applicants’
geographic location in making funding and tax credit allocation decisions. We also reviewed
annual notices of funding and allocation availability, reports on annual awards and allocations,
applicable laws and regulations, prior GAO reports, and other documentation. We further
reviewed the CDFI Fund’s guidance for certifying CDFIs and CDEs because financial
institutions generally must apply to the CDFI Fund for certification as CDFIs or CDEs before
they can apply for CDFI awards or NMTC allocations, respectively. We also obtained program
data to determine the numbers of approved and denied applicants for CDFI and CDE
certification. The CDFI certification data covered fiscal years 2004 through 2010 and the CDE
certification data covered calendar years 2003 through 2010. We reviewed lists of all certified
CDFIs and CDEs as of February 29, 2012, from the CDFI Fund’s website. We also interviewed
CDFI Fund officials.

Both programs used varying terms to describe geographic areas such as urban and rural areas.
To simplify presentation of geographic designations and develop consistent terminology for use
in our report, we consulted with agency officials and agreed to report information using
“metropolitan” and “nonmetropolitan” categories. Specifically, the CDFI and NMTC Program
applications require applicants to indicate the types of geographic areas they primarily serve—
major urban, minor urban, or rural. 29 For CDFI and NMTC Program applicants and awardees
that indicated they served primarily major or minor urban areas, we reclassified them as serving
metropolitan areas. For applicants and awardees that indicated they served primarily rural
areas, we reclassified them as serving nonmetropolitan areas. The transaction-level data we
received on CDFIs’ loans and investments outstanding and CDEs’ projects financed already
were presented in metropolitan and nonmetropolitan terms and therefore did not require
reclassification.

To address the second objective, we compared program data for metropolitan and
nonmetropolitan areas on (1) the number of CDFIs that received awards by primary geographic
service area, (2) the total amounts of awards and allocations CDFIs and CDEs received, and (3)
the total amounts of funding and investments deployed. We reviewed CDFI and NMTC Program
documentation to better understand each program’s proportionality goal. We conducted
interviews with program officials, including the CDFI Fund Office for Financial Strategies and




29
  According to the CDFI Fund, a major urban area is a metropolitan statistical area with a population equal to or
greater than 1 million, including both central city and surrounding suburbs. A minor urban area is a metropolitan
statistical area with a population of more than 50,000 and less than 1 million, including both central city and
surrounding suburbs. A rural area is any area not contained in a major or minor urban area. In the NMTC Program
application, applicants must indicate whether they serve major urban, minor urban, or nonmetropolitan areas.




Page 19                                                                       GAO-12-547R Community Development
Research and Office of Certification, Compliance Monitoring and Evaluation to discuss the data
captured by the various databases.

Analysis of CDFI Program Awards
The CDFI Program regulations require that awardees represent a geographically diverse group
serving metropolitan and nonmetropolitan areas. To assess the CDFI Program’s progress
toward its geographic diversity goal, we analyzed the proportion of qualified applicants to the
proportion of CDFI awardees serving nonmetropolitan areas for fiscal years 2004 through 2010.
From the CDFI Program, we obtained financial assistance application and award data on the
total number of qualified applicants and awardees. We calculated the percentage of qualified
applicants and awardees serving nonmetropolitan areas. We used financial assistance award
data and not technical assistance award data in our analysis of the geographic diversity goal
because of time constraints to collect the qualified applicant data broken down by primary areas
served. Our analysis of overall award data indicated that recipients of technical assistance
awards are slightly more likely to serve nonmetropolitan areas. As a result, our discussion of
proportionality in the CDFI Program may understate the percentage of awards that went to
CDFIs serving nonmetropolitan areas. However, the extent of this difference is limited since the
CDFI Program makes fewer technical assistance awards than financial assistance awards.
CDFI Program officials told us that in fiscal year 2004, they used a different scoring method and
a different applicant grouping process to categorize regular and Small and Emerging CDFI
Assistance (SECA) applicants. 30 We note these differences in our presentation of the 2004 data
on proportions of qualified CDFI Program applicants and awardees serving nonmetropolitan
areas.

To assess the primary geographic areas that CDFIs reported they served, we analyzed CDFI
Program data on award amounts for financial and technical assistance by CDFIs’ reported
primary geographic market served (metropolitan and nonmetropolitan). We obtained historical
application and award data from the CDFI Fund on awardee, primary geographic market,
amount of technical assistance funding, and amount of financial assistance funding for fiscal
years 2004 through 2010. The applications for financial and technical assistance capture the
primary geographic market variable. Applicants can serve a combination of geographic markets
(metropolitan or nonmetropolitan) but can self-select the geographic market that they primarily
serve. Because applicants choose only one area as “primarily” served, the data do not
necessarily capture where CDFIs ultimately make loans and investments or capture CDFIs that
self-identify as primarily serving metropolitan areas but also make loans and investments in
nonmetropolitan areas. Therefore, we cannot say with certainty that CDFIs invest all of their
awards in the areas that they select as their primary geographic markets. In addition, for 2004,
data on the primary geographic market for technical assistance applicants were not readily
available because the 2004 applications were paper based. As a result, we did not include 100
awardees from 2004 in our data set. In addition to these limitations, the data do not reflect de-
obligation of awards completed before May 2008 because the CDFI Fund did not have any
electronic system to record de-obligations before that time.




30
  The SECA category allows CDFIs with assets of less than a certain amount or in operation for fewer than 5 years to
apply separately from larger and more established (regular) CDFIs. From fiscal years 2004 through 2010, SECA
applicants received approximately 13 percent of the total dollar amount of financial assistance awards, while regular
applicants received approximately 87 percent of financial assistance funding.




Page 20                                                                       GAO-12-547R Community Development
To assess the amounts and number of investments and loans that CDFIs deployed to
metropolitan and nonmetropolitan areas, we obtained transaction-level program data. Our
review focused on fiscal years 2004 through 2010, for which complete transaction-level data
were available for individual transactions (for example, a loan made to a local business) from
the Community Investment Impact System (CIIS) database. We obtained aggregate data on the
number and dollar amount of loans and investments outstanding, as well as the percentage of
transactions and percentage of dollars outstanding by year and metropolitan status. There are
two main limitations to the data set. First, the transaction-level data for the CDFI Program
represent CDFIs’ loans and investments outstanding (to which we also refer as total portfolio
outstanding) at the end of each reporting year and reflect CDFI Program awards combined with
the CDFIs’ other funding sources. Therefore, the data do not allow us to identify which loans
and investments resulted directly from CDFI Program awards. In addition, the program does not
require certain types of financial institutions (for example, regulated depository institutions such
as banks, bank holding companies, and credit unions) to report loan and investment data
because bank call reports (quarterly reports that collect basic financial data from commercial
banks) already capture this information. Technical assistance awardees also are not required to
submit transaction-level reports because these awards are intended for internal capacity-
building activities rather than for providing financial and developmental services to the
community. However, some of these CDFIs voluntarily submit transaction-level data to the CDFI
Fund. For example, program officials stated that in fiscal year 2011, 21 of 37 regulated
depository institutions, or about 57 percent, voluntarily submitted these data reports. They also
stated that, in general, 70 percent of all financial and technical assistance awardees submitted
these reports, as did approximately 85 percent of all financial assistance awardees. But
because not all CDFI awardees must report transaction-level data, we cannot generalize the
findings to the entire CDFI awardee population.

Analysis of NMTC Program Allocations
The NMTC Program ensures that a proportionate number of applicants that are “rural CDEs”—
CDEs that principally serve nonmetropolitan areas—receive tax credits. It also attempts to
ensure that at least 20 percent of the aggregate investments made with each round of NMTC
allocations are made in eligible nonmetropolitan areas. To describe the extent to which the
NMTC Program allocated tax credits to rural CDEs, we reviewed annual allocation reports. To
assess the extent to which the NMTC Program has met the proportionality goal for investments
in nonmetropolitan areas, we analyzed the total CDE community investments to
nonmetropolitan areas for calendar years 2008 through 2011. Using the annual NMTC Program
allocation reports, we compiled data on total funding, the number of CDEs making investments
in nonmetropolitan areas, and total investments committed to nonmetropolitan areas for the
years the policy was in place (from 2008). We calculated the percentage of the total investments
committed to nonmetropolitan areas and present the data in terms of calendar years because
the program conducts its allocation rounds on a calendar year basis.

To assess the amounts and number of investments and loans that CDEs deployed to
metropolitan and nonmetropolitan areas, we analyzed the dollar amount and number of CDE
projects financed in metropolitan and nonmetropolitan areas for fiscal years 2003 through 2010.
The NMTC Program provided us with aggregate transaction-level data on the total amount of
qualified low-income community investment and with the metropolitan statistical area and
combined metropolitan statistical area of the project location (MSACMSA code). To sort the
data by metropolitan and nonmetropolitan, we created a new variable based on the MSACMSA
code. We calculated the percentage of dollars and percentage of community investments for
fiscal years 2003 through 2010. We present this information in terms of fiscal years because this
is how the NMTC Program collects the data.


Page 21                                                            GAO-12-547R Community Development
For all the analysis on CDFI and NMTC programs, we used data obtained from the CDFI Fund’s
CIIS and internal certification, application, and award databases. We conducted a reliability
assessment of the data by reviewing documentation from the CDFI Fund and its data
contractor, Kearney & Company, which maintains and manages the CIIS database. Specifically,
we reviewed their processes for ensuring consistent data entry and for addressing potentially
inaccurate data. We also interviewed officials from the CDFI Fund to address questions about
the reliability of the information and checked the data for extreme values and missing data
points. We found the data to be sufficiently reliable for our purposes.

We conducted this performance audit from January to April 2012 in accordance with generally
accepted government auditing standards. Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We believe that the evidence obtained provides
a reasonable basis for our findings and conclusions based on our audit objectives.




Page 22                                                         GAO-12-547R Community Development
Enclosure II: Certified CDFIs and CDEs by State or Territory as of
February 29, 2012
Figure 6 lists all certified Community Development Financial Institutions (CDFI) and Community
Development Entities (CDE) as of February 29, 2012. The numbers of CDEs represent both the
applicant CDEs and their subsidiaries, which are legal entities that applicant CDEs own or
directly control and to which CDEs can transfer all or part of their allocation authority.

Figure 6: Certified CDFIs and CDEs by State or Territory as of February 29, 2012




Page 23                                                                   GAO-12-547R Community Development
Enclosure III: CDFIs’ Percentages of Total Portfolios Outstanding in
Nonmetropolitan Areas by State, Fiscal Years 2004-2010
We obtained data from the CDFI Program on the total dollar amount of CDFIs’ loans and
investments outstanding (also referred to as total portfolio outstanding) by state and
metropolitan or nonmetropolitan status for fiscal years 2004 through 2010. Figure 7 represents
the percentage of total portfolios outstanding in nonmetropolitan areas in each state over this
time period.

Figure 7: CDFIs’ Percentages of Total Portfolios Outstanding in Nonmetropolitan Areas by State, Fiscal
Years 2004-2010




Page 24                                                                  GAO-12-547R Community Development
Enclosure IV: CDEs’ Percentages of Projects Financed in Nonmetropolitan Areas
by State, Fiscal Years 2003-2010
We obtained data from the NMTC Program on the dollar amount of projects financed by CDEs
by state and nonmetropolitan status for fiscal years 2004 through 2010. Figure 8 represents the
percentage of projects financed in nonmetropolitan areas in each state over this time period.

Figure 8: CDEs’ Percentages of Projects Financed in Nonmetropolitan Areas by State, Fiscal Years 2003-2010




Page 25                                                                GAO-12-547R Community Development
Enclosure V: Comments from the Department of the Treasury




Page 26                                            GAO-12-547R Community Development
           Enclosure VI: GAO Contact and Staff Acknowledgments
           GAO Contact
           Daniel Garcia-Diaz, (202) 512-8678 or garciadiazd@gao.gov

           Staff Acknowledgments:
           In addition to the contact named above, Paul Schmidt, Assistant Director; William R. Chatlos;
           Elizabeth Jimenez; Marc Molino; Patricia Moye; Lisa Reynolds; and Barbara Roesmann made
           key contributions to this report.




(250652)
           Page 27                                                         GAO-12-547R Community Development
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